Amazon Thwarts Netflix With Lovefilm Buy

Amazon is buying Lovefilm for a reported $320 million, giving itself a foothold in the British market for online movie rentals that could help it keep Netflix from moving in.

Lovefilm has more than 1.25 million subscribers across Europe, with the majority in the U.K., and was formed out of the combination of companies Video Island, Screen Select and DVDs On Tap. Venture capital firms Index Partners and Balderton were stakeholders in the firm.

Saul Klein, the former CEO of Video Island who is now a partner with Index, tells me that Amazon will probably aim to grow Lovefilm's distribution larger and faster. "My expectation is if Lovefilm has a million and a half subscribers today, it'll have 10-20 million subscribers in the future. If it's on three to four devices today, it'll be on 50 in the future."

London-based Lovefilm booked a profit of 9 million pounds in 2009 on revenue of 97 million pounds, and Klein says earnings have "grown considerably" since then.

"We're not going to continue to want a stake in the company," he adds. "It's an exit for all the investors including the founders." Amazon had already been a majority shareholder in Lovefilm before the deal, with a holding upwards of 40%.

Though Lovefilm's subscriber-base dwarfs that of Netflix, which boasts 16 million subscribers in the U.S., Amazon's acquisition of the company will help it create a bulwark in Europe--Lovefilm also has significant subscribers in Germany and the Nordics.

Netflix told the Canadian Broadcasting Corporation in December that it was planning to invest in international expansion this year. "Based on the early success of Netflix.ca we’re going to continue our international expansion next year and we’re going to allocate significant dollars to it,” Netflix's Chief Executive Reed Hastings said.